The European Union’s Carbon Border Adjustment Mechanism (CBAM) emerges as a seminal policy innovation. This blog post offers an exploration of CBAM. We dissect the what-why-who-when-how.
What? Carbon pricing for imports.
The Carbon Border Adjustment Mechanism (CBAM) is a groundbreaking initiative by the European Union, designed as a key component of the European Green Deal. At its core, CBAM is a carbon pricing system for imports of certain goods into the EU. It targets goods from sectors with high carbon emissions, such as steel and cement, requiring importers to purchase carbon certificates corresponding to the carbon price that would have been paid if the goods were produced under the EU’s carbon pricing rules (i.e., the European Emission Trading System).
Why? To limit carbon leakage.
The Carbon Border Adjustment Mechanism (CBAM) is pivotal in the European Union’s strategy to limit carbon leakage, a phenomenon where companies transfer production to countries with laxer emission constraints, undermining the EU’s ambitious climate targets. CBAM addresses this by leveling the playing field: it imposes a carbon cost on imports equivalent to what would have been paid if produced within the EU, thereby discouraging the shift of emissions-intensive industries to non-EU countries. This mechanism not only ensures that the EU’s carbon pricing does not put domestic producers at a competitive disadvantage but also encourages global partners to strengthen their climate policies. Its implementation is a delicate balancing act, aiming to comply with Worl Trade Organization (WTO) ruleswhile pushing for an environmentally sustainable trade environment.
Who? High-carbon imports.
The scope of the Carbon Border Adjustment Mechanism (CBAM) is initially targeted at specific imports known for their substantial carbon footprints. Industries producing cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen will be the first to feel the impact of CBAM. These sectors have been identified due to their significant contributions to pollution, and there’s a recognized risk of these industries relocating outside the EU to regions with less stringent environmental regulations. Over time, CBAM is expected to broaden its reach, encompassing more sectors responsible for over half of the carbon impact within the European Union’s Emissions Trading System (ETS). This gradual expansion underscores CBAM’s commitment to comprehensive carbon pricing across diverse industries.
Whitin CBAM, the central responsibility lies with the importer. However, several other stakeholders are also involved (see figure below):
- Importers: Importers are businesses or entities within the European Union that bring in goods from outside the EU. Under CBAM, importers are obligated to purchase and prove carbon certificates corresponding to the embedded carbon costs of the imported products.
- Exporters: These are businesses or entities responsible for producing and exporting goods to the European Union. Exporters should report relevant information about the emissions associated with the production of their goods to importers.
- Authorities: Both at European level and Member State level, governmental bodies are responsible for implementing and overseeing CBAM (National customs, European Commission, Competent National Authority). These authorities are tasked with verifying the accuracy of the information provided by exporters and importers, ensuring compliance with CBAM regulations, and managing the issuance and redemption of carbon certificates.
- Verification Bodies (optional): CBAM may involve third-party verification bodies responsible for independently assessing and verifying the emissions data and compliance of exporters and importers. These bodies play a role in ensuring the integrity and accuracy of the information reported under CBAM.
When? As of October 2023.
The implementation of the Carbon Border Adjustment Mechanism (CBAM) unfolds in two distinct phases. Commencing with a preliminary test phase on October 1, 2023, the initial stage focuses solely on reporting requirements, exempt from the obligation to pay CBAM certificates. The inaugural reporting deadline was set for January 31, 2024. This deliberate and gradual commencement allows businesses and governments within the EU and other nations to adapt systematically.
Moving forward, starting in 2026, companies must provide detailed information on their annual import quantities and associated pollution levels. This then also entails acquiring CBAM certificates, the cost of which is contingent upon EU Emissions Trading System (ETS) prices. At the same time, grandfathering of EU emission allowances under the EU ETS will be phased out by 2026.
How? Five reporting requirements.
Under CBAM, reporting requirements for importers are focused on the carbon content of certain imported goods. The primary goal is to account for the emissions associated with the production of these goods, ensuring that carbon costs are reflected in their pricing as they enter the European Union market. Here are the key aspects that need to be reported under CBAM:
- Quantity of Imported Goods Covered: Importers are required to report the quantity of imported goods covered by CBAM.
- Emission Data for Imported Goods: Importers must now report how much greenhouse gases are made when producing goods they bring into the country. In the transition phase, the importers needs to include both direct and indirect emissions. In the definitive phase, they will only report direct emissions. The boundaries of the embedded emissions matches the EU’s carbon trading system, not the full life cycle emissions as in the GHG Protocol (e.g. Scope 3.1 Goods & Services). Importers should try to get exact emissions data from their suppliers. Until July 2024, they can estimate using default values as much as they need. After that, they can only estimate up to 20% of the emissions with these values.
- Carbon pricing: If the exporting country has carbon pricing mechanisms in place, these are taken into account. Importers can report the cost already incurred for carbon pricing in the country of origin, which can be offset against the CBAM costs.
- Verification and Documentation: Importers are required to provide verified documentation of the carbon emissions associated with their imported products. This may involve third-party verification to ensure accuracy and compliance with the EU’s standards.
- Carbon Pricing Compliance: Importers must purchase and surrender CBAM certificates, which represent the carbon price that would have been paid if the goods were produced under the EU’s carbon pricing policies. The number of certificates correlates with the tonnage of carbon dioxide emissions embedded in the imported products.
Note that reporting aspects 4-5 are only required as of the definitive phase from January 2026 onwards, while reporting aspects 1-3 are already required as of the transition phase from October 2023.
Role of Carbon+Alt+Delete
Carbon+Alt+Delete can help importers with reporting under CBAM. When doing a full corporate carbon footprint, the embedded emissions of imported goods will be anyhow reported under scope 3 – as covered by our carbon accounting engine – with life cycle emissions of these goods. Carbon+Alt+Delete allows to add supplier-specific emissions and verification documents, in line with CBAM requirements. All CBAM related data-points can also be highlighted and exported
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